Bank of England remains focused on blockchain after Brexit

Despite widespread economic uncertainty in recent months, the Bank of England (BofE) indicated last week that it has not been distracted from its plan to enable a "fintech transformation" of the financial services industry.

The plan was first unveiled by BofE Governor Mark Carney in June, and in a speech last Thursday, chief cashier Victoria Cleland reiterated that devising a regulatory approach to fintech remains a priority for the bank. She also highlighted the bank's continued research around central bank digital currencies ( CBDC).

A CBDC is a digital version of a national currency, which can theoretically be held in accounts owned by individuals or businesses at a central bank. Right now, only a small number of financial institutions are typically able to hold accounts at central banks, and everyone else must hold an account with one of those financial institutions.

Cleland outlined two significant areas related to CBDCs that the BofE is researching:

Economic implications of a CBDC — specifically the possible reduction of the availability of credit.The ability to hold money at a central bank would likely lead people to move their money out of existing deposit accounts and into central bank accounts. That's because, unlike commercial banks, the central bank does not lend out deposits, so people might consider their deposits to be safer there. But this could lead to a reduction in deposit funding at commercial banks, which would negatively impact their ability to make loans, likely resulting in a significant reduction in the availability of credit. The risks this could pose are still being fully explored and understood, according to Cleland.

Technical feasibility of using blockchain technology to create a CBDC. Blockchain technology seems the most likely candidate for such a task, given its capability for creating multiple immutable ledgers and instantly recording transactions. But it is still very much experimental, and Cleland questioned whether the technology is the best way to achieve the necessary scale a CBDC would require. She also highlighted that the resilience and security of blockchain-based technology are still relative unknowns, as are the potential operational requirements. The BofE has already started to address these questions — it published a set of Digital Currency Research Questions for external researchers to ponder in July 2016, and Cleland stated that the bank is still very keen to receive responses.

Cleland also reiterated that the BofE continues to look for new opportunities to leverage fintech to the bank's advantage through its fintech accelerator, which launched in June. This indicates that, despite the challenges the bank currently faces, it still believes that fintech offers significant benefits to central banking operations.

Blockchain technology, which is best known for powering Bitcoin and other cryptocurrencies, is gaining steam among finance firms because of its potential to streamline processes and increase efficiency. The technology could cut costs by up to $20 billion annually by 2022, according to Santander.

That's because blockchain, which operates as a distributed ledger, has the ability to allow multiple parties to transfer and store sensitive information in a space that's secure, permanent, anonymous, and easily accessible. That could simplify paper-heavy, expensive, or logistically complicated financial systems, like remittances and cross-border transfer, shareholder management and ownership exchange, and securities trading, to name a few. And outside of finance, governments and the music industry are investigating the technology's potential to simplify record-keeping.

As a result, venture capital firms and financial institutions alike are pouring investment into finding, developing, and testing blockchain use cases. Over 50 major financial institutions are involved with collaborative blockchain startups, have begun researching the technology in-house, or have helped fund startups with products rooted in blockchain.

Jaime Toplin, research associate for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on blockchain technology that explains how blockchain works, why it has the potential to provide a watershed moment for the financial industry, and the different ways it could be put into practice in the coming years.

Here are some key takeaways from the report:

Spending on capital markets applications of blockchain is expected to grow at a 52% compound annual growth rate (CAGR) through 2019, according to Aite Group, to reach $400 million that year.

Banks and major financial institutions are working both collaboratively and independently to develop blockchain tech. Over 50 major financial institutions are involved with collaborative blockchain startups, like R3 CEV or Chain. And many are investing in the technology on their own as well.

Putting blockchain to use for real-world transactions is likely not that far off. If working groups' tests are successful, firms could be using it to transact real value as early as the end of this year and we could see widespread industry application within the next few years.

In full, the report:

Examines the funding increases that are pouring into blockchain

Assesses why blockchain is becoming so popular and what factors are driving up increased research and development

Explains in full how blockchain technology work and what assets make it valuable and vulnerable

Identifies pain points in the financial industry and profiles how various firms are using blockchain to solve them

Demonstrates the challenges to mainstream adoption and their potential solutions

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